Will Health Care REIT (HCN) Miss Earnings This Season? - Analyst Blog

Health Care REIT Inc. (HCN), is set to report its third-quarter 2014 results on Nov 4, before the opening bell. In the prior quarter, it delivered a positive earnings surprise of 4.95%.

Let's see how things are shaping up for this announcement.

Factors to Consider

Health Care REIT is on an acquisition spree to strengthen its focus on high-barrier-to-entry affluent markets around the world. In third quarter 2014, this real estate investment trust (REIT) acquired Gracewell assets with Sunrise Senior Living. Moreover, the company unveiled its plan to acquire HealthLease Properties REIT through a transaction valued at around $950 million in cash, including debt.

Further, Health Care REIT announced its projected acquisition pipeline, worth around $1.7 billion of properties, for the second half of 2014. Such strategic portfolio acquisitions would serve as growth drivers for the company.

However, though acquisitions and developments are a strategic fit, such moves involve considerable upfront costs. Notably, the company's overall expenses escalated 14% year-over-year in the second quarter 2014. Also, it rose in the past few years too (up 72% in 2013, 34% in 2012 and more than double in 2011). Hence, rising expenses are a concern.

Earnings Whispers

Our proven model does not conclusively show that Health Care REIT is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) and a Zacks Rank of #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Negative Zacks ESP: The company's Most Accurate estimate stands at $1.02, while the Zacks Consensus Estimate is pegged slightly higher at $1.03. This results in an Earnings ESP of -0.97%.

Zacks Rank #3: Health Care REIT's Zacks Rank #3 when combined with a -0.97% Earnings ESP makes surprise prediction difficult.

Notably, we caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

You could consider other stocks in the REIT sector that have both a positive Earnings ESP and a favorable Zacks Rank. These companies are going to report their results on Nov 4:

DiamondRock Hospitality Co. (DRH), with an Earnings ESP of +4.35% and a Zacks Rank #2.

Hospitality Properties Trust (HPT), with an Earnings ESP of +2.41% and a Zacks Rank #3.

Chatham Lodging Trust (CLDT), with an Earnings ESP of +2.90% and a Zacks Rank #3.